November 2, 2023
Yesterday’s equity rally carries over as 10-year yields sink below 4.70% after the Treasury announced plans to slow the pace of increases in long-term bond sales in coming quarters. Weaker-than-expected data also helped drive yields lower in yesterday’s session.
Markets are largely ignoring yesterday’s large ISM manufacturing miss because it contradicts with this month’s manufacturing PMI that returned to expansion territory. We should also mention that ISM manufacturing has been in contraction territory since October ‘22 and has printed worse readings earlier this year. Tomorrow’s non-farm payroll data and ISM services reports are more important as the Fed is now looking at above trend GDP and the labor market as key variables. Consensus is looking for an ISM services print of 53, down from 53.6 in September. For tomorrow’s Jobs Report, consensus is looking for non-farm payrolls of +189,000, down from +336,000. A big miss from either report will result in an imminent recession narrative with a break in the positive correlation between stocks and bonds.
AAPL results this afternoon could also have macro implications given the setup. The stock has rebounded this week with the other NYFANG constituents along with positive overnight readthroughs from QCOM. However, QCOM management called out strength from their Android business and China-based OEMs, where the government has imposed soft iPhone restrictions.
Ten-year yields are presently trading below our trend inflection range of 4.73%. A sustained close below 4.73% will signal a short-term peak in bond yields. The short-term change in trend will add support to the equity relief rally assuming there’s no immediate shift to a recession narrative. All else equal, 10-year yields in the 4.57%-4.72% range could drive another ~2% advance in the SPX to ~4400. The Goldilocks/soft-landing scenario would see 10-year yields falling below 4.48% with a sequence of stronger than expected data. We don’t see that happening given the current inflationary backdrop, but the low-probability scenario could take the SPX back to summer highs near 4610. For now, we see the ~4400 level capping the relief rally and maintain our tactically bearish outlook.